Posted:November 4, 2015

Pulse: Economic GIGO

It’s Time to Keep Some Powder Dry

Here is an excerpt from yesterday’s post by MN Gordon* dealing with the familiar concept to computer scientists of ‘garbage in, garbage out’ (GIGO) as applied to monetary policy:

“The Fed believes that by fixing the price of money artificially low, they’ll increase something they call ‘aggregate demand.’ The thesis is that cheap credit will compel individuals and businesses to borrow more and consume more. Before you know it, the good times will be here again. Profits will increase. Jobs will be created. Wages will rise. A new cycle of expansion will take root. Sounds great, doesn’t it?

“In practice, however, the results are destructive. While cheap credit may have a stimulative influence on an economy with moderate debt levels, once an economy has reached total debt saturation, where the economy can no longer support its debt overhang, the cheap credit trick no longer works to stimulate the economy. Like applying additional fertilizer to an already overstimulated crop field, the marginal return of each unit of additional credit in terms of new growth diminishes to nothing. In fact, the additional credit, and its counterpart debt, actually strangles future growth.

“The experience following the Great Recession is that the abundance of cheap credit floods not into the economy, but into asset prices…grossly distorting them in the process. The simple fact is solving the problem of too much debt by pushing more debt doesn’t solve the problem at all. It makes it worse.

“. . . . The point is the radical monetary policy interventions being employed by the Fed to somehow improve the economy are being guided by garbage.”

I don’t often comment on economic or political matters, but I have deep near-term concerns about debt and monetary policy.